BELIEF: Blueprint to Establish Leading Infrastructure, Economy & Finance in Lebanon
Due to an immense economic decline, paired with high inflation and the currency devaluating, residents in Lebanon lost their jobs, incomes, and life savings. The Lebanese government canceled a $90 billion debt payment, with the majority retained by the local banking system. Additionally, the central bank accumulated losses on foreign exchange operations. Banks became insolvent, froze deposits, and officially requested for the use of capital controls. The “Lebanese Government’s Reform Draft” has proposed a solution to the large-scale crisis. This blueprint builds on that document and aims to complement it. Key components of our proposal include:
Growth-Driven Reforms: Lebanon’s deep crisis calls for a new way to handle fiscal policy.
Currently, tax increases will lead to lower revenues and public monopolies will continue squandering borrowed money on pointless projects. High debt burdens and debt haircuts on future generations will follow. Therefore, we recommend replacing current taxes with a single, simple flat tax, similar to what several former communist countries have done. We also recommend dismantling monopolies and opening markets to competition. Due to the competitive market conditions, the government would show a decreased need to borrow and spend. Furthermore, it would substantially improve the infrastructure quality and reduce the cost, while creating a foundation for sound economic growth.
Currency Board: We expect the suggested dirty float of the exchange rate to lead to recurrent devaluations, further impoverishing the population due to the central bank’s tendency to finance fiscal deficits. To fix the currency crisis, we argue for replacing the central bank (Banque du Liban, or BDL for short) with a currency board. Unlike the dirty float, a currency board would ensure a reliable, stable, and fully convertible Lebanese pound (LBP). A currency board would also deprive the monetary authorities of the ability to finance the government and thus would impose monetary discipline that Lebanon has clearly lost since at least 2015.
Cumulative Interest: The government debt and BDL’s mismanagement should not be entirely borne by depositors. Both entities need to dismantle monopolies, liquidate their assets, and cover a portion of their losses. Rather than imposing an unfair haircut on depositors above a certain threshold, we recommend revealing cumulative interest paid by Lebanese banks to their depositors since the 2015 Ponzi scheme. This would include depositors that already transferred their money outside of Lebanon. Cumulative interest should be the second source of a bail-in, after banks’ shareholder equity. This process, used in the Bernie Madoff fraud case, allowed the conservators to preserve the initial principal invested.
Our suggested reforms would allow the government to raise more income without increasing taxes, to cut spending without discouraging investment, to stabilize the LBP without making losses on foreign exchange operations, and to restructure banks without shifting the entire burden onto depositors.